How to Automate Your Savings

Last week I wrote about how I’ve tricked myself into living with a paycheck to paycheck mentality by automating my savings, and encouraged everyone to do the same. I thought it might be useful to talk a bit about how to get started automating your savings. Like many 20-somethings, I had a lot of concerns about automating my savings when I was first getting started. My biggest concern was, what if money automatically moves out of my checking account, but then I end up needing it? In retrospect, it’s easy to see why that was a silly concern, but when you’re thinking about making a big change, everything seems scary and you find any excuse you can to maintain the status quo. But no more, leave your excuses at the door and read on for a step-by-step guide to automating your savings.

1) Track your expenses for three months

Sign up for a program like Mint or Personal Capital (both free) and start tracking your expenses. I currently use Mint, but I understand Personal Capital does everything Mint does plus more. You can view all your expenses by category, so you see exactly where your money is going.

You should also pay attention to how much money you have left over at the end of the month, as this will serve as a baseline for future savings.

What you should learn:

Where your money is going

How much money you have left over each month

2) Set up an automatic transfer for an amount you can currently swing

If you saved $500 the first month, $100 the second, and $200 the third, err on the side of caution and set up an automatic transfer for $100. The goal is that the money left over after the automatic transfer should put a little pressure on you to keep spending down, but still leave some wiggle room in case their are unexpected expenses. (NOTE: If you didn’t have any money left over or if you spent more than you earned, don’t set up an automatic transfer yet, skip to the next step, and don’t set up an automatic transfer until you can save something three months in a row.)

Where should that automatic transfer go? That depends on your situation. If you don’t yet have a sufficient emergency fund, put it there. Your emergency fund should be with the same bank where you have your checking account. This addresses the concerns I had about automated savings. If you end up needing that money, you can transfer it back into your checking account, and I believe most, if not all, banks will make that money available immediately. If you’ve already saved up for emergencies, I recommend investing in a low cost index fund. I use Vanguard for my investments and have automatic transfers set up for the day after I get paid each month.

3) Set a budget and stick to it for three months

Looking back at your expenses for the past three months, identify areas where you could cut spending. I think at this point it’s too early to put a dollar amount on any category of spending, it would just be an arbitrary number. Instead, look for the categories that jump out at you and budget your lifestyle, not your money. For instance, if you notice that you went out to dinner twelve times per month, substitute one restaurant meal with a home cooked meal each week. If you see that you went to the mall every single week, reduce your shopping trips to once every other week (but don’t buy twice as much stuff!)

What you should learn:

That your life didn’t get any worse living on a budget

How much money you have left over each month on a budget

4) Increase your automatic transfer

After three months of living on a budget, you should start to see some extra money sitting in your checking account. Again, err on the side of caution and increase your automatic transfer by only the smallest amount you were able to save in one month.

5) Repeat steps 3 and 4 until you’re happy with your spending/saving balance or, if you’re a bad ass, until there’s nothing else you can cut from your budget.

Bonus Step: Every time you get a raise, increase your automatic transfer.

4 Responses to How to Automate Your Savings

Good advice. I’ve found automating my savings is by far the easiest way to stick to the plan. My employer allows direct deposit to multiple accounts, so I can send it directly to savings out of each paycheck and not have to worry about it at all.

We track all of our expenses and assets in Quicken. It is great for keeping us on track. We also use ING to auto deposit every paycheck so much to savings. We never see the money which saves us from spending it on something else.